How to Make Money in Sideways, Volatile or Negative Markets

April 22, 2017 | Andy Blandford

Most of us understand that investment is about buying low and selling high, right? Yet so many private investors fail to realise consistent and meaningful profits from their investments. Why is this?

Unfortunately, the media and the investment sector carries a part of the blame for this, in my opinion. The media has helped create an immediate gratification culture, and parts of the investment industry promotes short-term results to capitalise from this culture. In my experience, too much focus upon short-term performance [as a competitive differentiator] can easily lead to accelerated risks as managers defend their prominent market position. And sooner or later, the music stops, and those ‘sexy’ gains disappear - often taking a sizeable part of the principle with it. Warnings such as “past performance is not an indicator of future performance” are little consolation after the fact.

One common school of thought is that frequent or day-trading through challenging markets is a viable answer. And it is, provided you don’t make a mistake, where one bad choice can offset all those good choices. With such an approach, activity doesn’t necessarily deliver better results but risk usually takes center-stage instead of value.

Instead of listening to the ‘hype’ why don’t we look at simple economics instead? Most investors recognise that economies generally move in cycles up and down through the years. When economies are suffering, cash becomes ‘king’, and intellectually, this would be the best time to be investing. However, there is the ‘people’ dimension to consider because a suffering economy impacts consumer behavior negatively where they defer expenditure, avoid risk, and hoard cash. Emotionally, many investors step out of the market altogether.

How might ‘simple economics’ help us make money in a challenging market? To balance risks while being objective about opportunities in the market, I operate strategies that are unusual (not unique) for my clients’ investment accounts. This ‘objective’ strategy collects positions across assets, markets and sectors that are suffering presently but can be expected to recover in a number of years’ time. Instead of trying to ‘beat the markets’ we now let the markets do the work and we use time to spread our investment risk. Such an approach does require a different narrative able to largely ignore the ‘noise’ of short-term gains and media. In fact, the more negative the noise and media, the better this approach works! Once the target position we collected cheaply has recovered we can now trade in a value-driven and upward-trending market as new investors arrive.